CYCLICALS/TRANSPORTS LEAD MARKET DECLINE
John J. Murphy
HURT BY ECONOMIC WEAKNESS... Weak economic numbers throughout the past week leave little doubt that the falling stock market is taking an economic toll. That's why it should be no surprise that the weakest market sector during the week were the economically-sensitive cyclical/transportation group. Within that group, retailers were hit pretty hard -- another sign that consumers are now on the defensive. Transportation stocks tumbled 4% on Friday and were especially weak. Basic industry stocks were also among the weakest groups. Especially heavy selling was seen in economically-sensitive chemicals and papers on Friday. For the week, some scared money sought relief in consumer staples, gold, and utilities -- which rebounded a bit. Bonds ended the week on a strong note.
Chart 1
Chart 2
BOND YIELDS FALLING... If you compare the 10-year T-note yield chart below to the stock charts above, you'll see a close correlation. That's because a weaker economy pushes bond yields lower -- along with stock prices. The 10-year T-note yield actually closed at the lowest level in eight months. When yields fall, prices rise. People are still fleeing stocks for the relative safety of the bond market. That's because bonds usually do better than stocks in a weakening economy.
Chart 3
FALLING RETAILERS... Retailers were among the day's (and week's) weakest groups. The next two charts show two of the biggest losers. Both retailers tumbled to new lows. Back on July 16, we did a story on falling retailers and asked why these stocks were falling if the consumer was so confident and the economy so strong. Anyone who bothered to look at the breakdowns in cyclicals and retailers knew that the consumer -- and the economy -- were in trouble. Anyone that is except economists and the TV media. That's why we depend on leading economic indicators -- like the stock market -- and not on lagging economic numbers. You can't drive a car by looking out the rear view mirror.
Chart 4
Chart 5
STILL IN CASH... The Dow lost 193 points as the stock market experienced another bad day. Even heavier losses were seen in the Nasdaq market -- which was pulled down by a falling semiconductor group (please see our morning update for a discussion of the falling SOX Index). A late bounce kept the Dow above initial chart support along the July 25 peak. We don't think that level will hold for long. As we said last night, our next downside target is to the 8,000 level. Sooner or later, we expect the recent lows to be retested -- and probably broken. If that doesn't happen this month (August), there's an even stronger chance for new lows during the traditionally-week September/October period. We're happy to report that the MurphyMorris Money Management accounts remain in a full cash position. Until further notice, cash is still king.
Chart 6
August 5, 2002
John J. Murphy, CNBC-TV's technical analyst for many years, and Greg Morris offer money managment and market services at MURPHYMORRIS.COM , email address orders@murphymorris.com .
Email this Article to a Friend 
Printer Friendly Version
